U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20778 / October 9, 2008

Accounting and Auditing Release No. 2894 / October 9, 2008

SEC Charges Former Duane Reade Executives with Accounting Fraud

The Securities and Exchange Commission today charged two former senior executives of Duane Reade with fraud for orchestrating multi-million dollar accounting schemes that caused the Duane Reade to inflate its reported earnings and overstate its net income. Duane Reade is the operator of the largest chain of drug stores in the New York Metropolitan area.

The SEC’s complaint, filed in federal court in Manhattan, alleges that the former Duane Reade executives entered into a series of fraudulent transactions designed to boost reported income, and enable the company to meet quarterly and annual earnings guidance. According to the SEC’s complaint, the fraudulent transactions were designed by the company’s former CEO, Anthony J. Cuti, and primarily implemented by its former Real Estate Administrator and one-time CFO, William J. Tennant.

The SEC’s complaint alleges that the earnings inflation scheme lasted from 2000 through 2004, and involved two kinds of transactions: The “Real Estate Concession” transactions and the “Credit and Rebilling” transactions. The Real Estate Concession transactions involved payments to Duane Reade for its agreement to relinquish purportedly valuable leases or other real-estate rights. The complaint alleges that these agreements were in reality a sham and that most transactions involved round-trip payments in which Cuti persuaded counter-parties to make payments to Duane Reade in exchange for his promise to repay them through other fictitious transactions. The complaint further alleges that Tennant prepared the false documentation used to implement the scheme.

In the Credit and Rebilling scheme, Cuti allegedly engineered different round-trip transactions that he designed to produce additional current income. The complaint charges that, at Cuti’s direction, Duane Reade vendors issued bogus credits to the company that were booked as a reduction to current expenses, resulting in a corresponding increase to current income. However, Cuti also directed these vendors to rebill Duane Reade for the credited amount in later periods under fictitious invoices. Accordingly, when Duane Reade later paid the vendors for phantom services, the fictitious credits were reversed. To disguise the connection between the invoice payments and the original credits, and to ensure that the payments could be capitalized and amortized, rather than charged against current income, Cuti allegedly had the vendors submit the fictitious invoices for work performed on a construction or maintenance project different from that on which the vendor had issued the credits.

According to the complaint, these schemes together caused Duane Reade to overstate its pre-tax income by a total of approximately $17.5 million. To assure the success of the Real Estate Concession scheme in inflating reported income, Cuti and Tennant are alleged to have intentionally deceived the company’s CFO and other members of management. Cuti also allegedly made false statements and omitted material facts in conversations with and written representations to the company’s independent auditors as to the true nature of the Real Estate Concession and Credit and Rebilling transactions.

The SEC seeks a final judgment permanently enjoining both defendants from committing future violations of Section 17(a) of the Securities Act of 1933, and from committing future violations of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 10b-5, 13b2-1, and 13b2-2, and from aiding and abetting future violations of Sections 13(a), 13(b)(2)(A), and 15(d) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, 13a-13, 15d-1, 15d-11, and 15d-13; and Cuti from committing future violations of Rules 13a-14 and 15d-14 of the Exchange Act, and from aiding and abetting future violations of Section 13(b)(2)(B); and ordering defendants to pay civil penalties and disgorgement of any ill-gotten gains with prejudgment interest. The Commission also seeks a judgment barring Cuti and Tennant from serving as officers or directors of any public company.

The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigations in this matter.